“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing...The depth of the pools of liquidity is so much larger than it used to be that a disruptive event now needs to be much more disruptive than it used to be.”
Chuck Prince, Citigroup Chief Exec in interview with the Financial Times 10 July 2007

Let us, led by Mr Prince, chant a psalm in praise of liquidity (with apologies to Psalm 20).

This interview is perhaps the perfect tour d’horizon of the actual state of liquidity affairs from any big lender’s perspective: it may end badly but they are compelled to play.

If there is a debating point it is Mr Prince’s argument that disruptive events now have to be much larger than in previous, shallower, liquidity regimes to cause significant discomfort.

Maybe. An alternative version is that in an ever-wider global economy any given event simply lasts longer as the knock on from say, rising rates in the world’s largest consumer economies, works its way through to the bulk of producer economies. And abundant liquidity may initially mask rather than mitigate the discomfort of this process.

US subprime, Mr Prince’s disruptive example in the interview, is not a chaotic act but a symptom of the shifting US cycle. It is not discrete; and how hurtful it becomes is unlikely to be a straight function of liquidity levels.

Some contextual data:

Exhibit 1, Long term trends in global liquidity

Exhibit 2, Global liquidity and the S&PX500

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  1. Freddie Sirmans // 7/11/2007 02:28:00 AM

    Just browsing the internet, very interesting blog

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